Upland Software, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes theret o included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Item 1A. Risk Factors.” This section and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. Forward-looking statements may be identified by the use of forward-looking words such as “anticipate,” “believe,” “may,” “will,” “continue,” “seek,” “estimate,” “intend,” “hope,” “predict,” “could,” “should,” “would,” “project,” “plan,” “expect” or the negative or plural of these words or similar expressions, although not all forward-looking statements contain these words. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled “Item 1A. Risk Factors” above, which are incorporated herein by reference. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. For a comparison of the years ended December 31, 2022 and 2021 refer to “Item 7. Management’s Discussion and Analysis” in the Company’s Annual Report on Form 10-K for the years ended December 31, 2022 filed with the SEC on February 28, 2023. All in formation presented herein is based on our fiscal calendar. Unless otherwise stated, references in this report to particular years or quarters refer to our fiscal years ended December 31 and the associated quarters of those fiscal years. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law. Overview We service customers ranging from large global corporations and government agencies to small- and medium-sized businesses. We have more than 10,000 customers across a broad range of industries, including financial services, consulting services, technology, manufacturing, media, telecommunications, government, insurance, non-profit, healthcare, life sciences, retail and hospitality. Through a series of acquisitions and integrations, we have established a library of diverse, cloud-based software applications under the Upland brand that address specific digital transformation needs. Our revenue has grown from $149.9 million in the year ended December 31, 2018 to $297.9 million in the year ended December 31, 2023, representing a compound annual growth rate of 15%. During each of the years ended December 31, 2023 and December 31, 2022, non-US revenue as a percent of total revenue was 30% . Our operating results in a given period can fluctuate based on the mix of subscription and support, perpetual license and professional services revenue. For the years ended December 31, 2023, 2022 and 2021, our subscription and support revenue represented 95%, 94% and 95% of our total revenue, respectively. Historically, we have sold certain of our applications under perpetual licenses, which also are paid in advance. For the years ended December 31, 2023, 2022 and 2021, our perpetual license revenue accounted for 2%, 2% and 1% of our total revenue, respectively. The support agreements related to our perpetual licenses are one-year in duration and entitle the customer to support and unspecified upgrades. The revenue related to such support agreements is included as part of our subscription and support revenue. Professional services revenue consists of fees related to implementation, data extraction, integration and configuration and training on our applications. For the years ended December 31, 2023, 2022 and 2021, our professional services revenue accounted for 3%, 4%, and 4% of our total revenue, respectively. To support continued growth, we intend to pursue acquisitions of complementary technologies, products and businesses. This will expand our product families, customer base and market access, resulting in increased benefits of scale. We will prioritize acquisitions within our current enterprise solution categories as described in “ Item 1. Business ” herein. Consistent with our growth strategy, we have completed a total of 31 acquisitions from February 2012 through December 31, 2023. 37 Acquisitions completed during the years ended December 31, 2023, 2022 and 2021 include the following: Acquisitions 2023 Acquisitions • None 2022 Acquisitions • BA Insight - On February 22, 2022, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of BA Insight Inc., (“BA Insight”), a cloud-based enterprise knowledge management solution. • Objectif Lune - On January 7, 2022, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of Objectif Lune Inc., a Quebec proprietary company (“Objectif Lune”), a cloud-based document workflow product. 2021 Acquisitions • Panviva - On June 24, 2021, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of Panviva Pty Ltd, an Australian proprietary company (“Panviva”), a cloud-based enterprise knowledge management solution. • BlueVenn - On February 28, 2021 the Company entered into an agreement to purchase the shares comprising the entire issued share capital of BlueVenn Group Limited, a company limited by shares organized and existing under the laws of England and Wales (“BlueVenn”), a cloud-based customer data platform. • Second Street - On January 19, 2021, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of Second Street Media, Inc., a Missouri corporation (“Second Street”), an audience engagement platform. Sunset Assets In connection with periodic reviews of our business, we have decided to discontinue the availability of certain non-strategic product offerings and a limited number of non-strategic customer contracts (collectively referred to as “Sunset Assets”). During the three months ended December 31, 2022, we decided to classify as Sunset Assets certain non-strategic product offerings representing an estimated $27.9 million of 2023 annual total revenue. During the second quarter of 2023, we determined that certain product offerings that had previously been placed in Sunset Assets did have use cases that would be strategic and, as a result, we removed them from our Sunset Assets. At the same time, we identified other product offerings and certain non-strategic customer contracts to include in Sunset Assets. The net effect of these actions in the second quarter of 2023 resulted in the estimated addition of approximately $5.0 million in 2023 annual total revenues to our Sunset Assets. Subsequently, during the three months ended December 31, 2023, a non-strategic product offering was identified and included in Sunset Assets adding an additional estimated $9.9 million in 2023 annual total revenues to our Sunset Assets. As a result of the discontinuation of these Sunset Assets, the Company has established end of life targets and reduced certain expenditures related to the sales and marketing of the Sunset Assets. It is possible that during future periodic reviews of our business we may determine to add additional non-strategic product offerings or non-strategic customer contracts to Sunset Assets or remove certain product offerings or customer contracts from the classification of Sunset Assets. In either case, we will adjust the revenues attributable to Sunset Assets for the then current period and properly reflect the year over year change for such addition or removal. Components of Operating Results Revenue Subscription and support revenue . We derive our subscription revenue from fees paid to us by our customers for use of our cloud-based applications. We recognize the revenue associated with subscription agreements ratably over the term of the agreement as the customer receives and consumes the benefits of the cloud services through the contract period. Our subscription agreements typically have terms of one to three years. 38 Our support revenue consists of maintenance fees associated with our perpetual licenses and hosting fees paid to us by our customers. Typically, when purchasing a perpetual license, a customer also purchases maintenance for which we charge a fee, priced as a percentage of the perpetual license fee. Maintenance agreements include the right to support and unspecified upgrades. We recognize the revenue associated with maintenance ratably over the term of the contract. In limited instances, at the customer’s option, we may host the software purchased by a customer under a perpetual license on systems at our third-party data centers. Perpetual license revenue . Perpetual license revenue reflects the revenue recognized from sales of perpetual licenses to new customers and additional perpetual licenses to existing customers. We generally recognize the license fee portion of the arrangement up-front at a point in time when the software is made available to the customer. Professional services revenue . Professional services revenue consists of fees related to implementation, data extraction, integration and configuration and training on our applications. We generally recognize the revenue associated with these professional services over time as services are performed. Revenues for fixed price services are generally recognized over time applying input methods to estimate progress to completion. Revenues for consumption-based services are generally recognized as the services are performed. Cost of Revenue Cost of product revenue . Cost of product revenue consists primarily of hosting costs, personnel-related costs of our customer success and cloud operations teams, including salaries, benefits, bonuses, payroll taxes, stock-based compensation, and allocated overhead, as well as software license fees, internet connectivity, depreciation expenses, amortization of acquired intangible assets, specifically developed technology, as a result of business combination purchase accounting adjustments and pass-through costs directly related to delivering our applications. We expect that cost of revenues may increase in the future depending on the growth rate of our new customers and billings and our need to support the implementation, hosting and support of those new customers. We intend to continue to invest additional resources in expanding the delivery capability of our applications. As we add hosting infrastructure capacity and support personnel in advance of anticipated growth, our cost of product revenue will increase, and if such anticipated revenue growth does not occur, our product gross profit will be adversely affected both in terms of absolute dollars and as a percentage of total revenues in any particular quarterly or annual period. Our cost of product revenue is generally expensed as the costs are incurred. Developed technology is valued using a cost-to-recreate approach and is generally amortized over a four- to nine-year period. Cost of professional services revenue . Cost of professional services revenue consists primarily of personnel-related costs, including salaries, benefits, bonuses, payroll taxes, stock-based compensation and allocated overhead, as well as the costs of contracted third-party vendors and reimbursable expenses. As most of our personnel are employed on a full-time basis, our cost of professional services revenue is largely fixed in the short-term, while our professional services revenue may fluctuate, leading to fluctuations in professional services gross profit. We expect that cost of professional services as a percentage of total revenues could fluctuate from period to period depending on the growth of our professional services business, the timing of sales of applications, and any associated costs relating to the delivery of services. Our cost of professional services revenue is generally expensed as costs are incurred. Operating Expenses Our operating expenses are classified into six categories: sales and marketing, research and development, general and administrative, depreciation and amortization, acquisition-related expenses and impairment of goodwill. For each category, other than depreciation and amortization and impairment of goodwill, the largest expense component is primarily personnel-related costs, which includes salaries, employee benefit costs, bonuses, commissions, stock-based compensation, and payroll taxes. Operating expenses also include allocated overhead costs for facilities, which are allocated to each department based on relative department headcount. Operating expenses are generally recognized as incurred. Sales and marketing . Sales and marketing expenses primarily consist of personnel-related costs for our sales and marketing staff, including salaries, benefits, deferred commission amortization, bonuses, payroll taxes, stock-based compensation and allocated overhead, as well as costs of promotional events, corporate communications, online marketing, product marketing and other brand-building activities. Sales commissions earned by our sales force, and related payroll taxes, are considered incremental and recoverable costs of obtaining a contract with a customer. Deferred commissions and other costs for a particular customer agreement for initial contracts are amortized over the expected life of the customer relationships while deferred commissions related to contract renewals are amortized over average renewal term. Sales commissions, and related payroll taxes, are earned when the initial customer contract is signed and upon any renewal as our obligation to pay a sales commission arises at these times. Sales and marketing expenses may fluctuate as a percentage of total revenues for a variety of reasons including the timing of such expenses, in any particular quarter or annual period. 39 Research and development . Research and development expenses primarily consist of personnel-related costs of our research and development staff, including salaries, benefits, bonuses, payroll taxes, stock-based compensation, allocated overhead and costs of certain third-party contractors. Research and development costs related to the development of our software applications are generally recognized as incurred. We have devoted our product development efforts primarily to enhancing the functionality, and expanding the capabilities, of our applications. Investment tax credits are included as a reduction of research and development costs. Inves tment tax credits are recorded in the year in which the research and development costs of the capital expenditures are incurred, provided that we are reasonably certain that the credits will be received. The investment tax credit must be examined and approved by the tax authorities, and it is possible that the amounts granted will differ fro m the amounts recorded. General and administrative . General and administrative expenses primarily consist of personnel-related costs for our executive, administrative, accounting and finance, information technology, legal, accounting and human resource staff, including salaries, benefits, bonuses, payroll taxes, stock-based compensation, allocated overhead, professional fees and other corporate expenses. We have recently incurred, and expect to continue to incur, additional expenses as we grow our operations, including potentially higher legal, corporate insurance, accounting and auditing expenses and the additional costs of enhancing and maintaining our internal control environment. General and administrative expenses may fluctuate as a percentage of revenue, and overtime we expect that general and administrative expenses will decrease as a percent of revenue due to operational efficiencies. Depreciation and amortization . Depreciation and amortization expenses primarily consist of depreciation and amortization of acquired intangible assets, specifically customer relationships and trade names, as a result of business combination purchase accounting adjustments. The valuation of identifiable intangible assets reflects management’s estimates based on, among other factors, use of established valuation methods. Customer relationships are valued using an income approach, which estimates fair value based on the earnings and cash flow capacity of the subject asset and are amortized over a seven to ten-year period. The value of the trade name intangibles are determined using a relief from royalty method, which estimates fair value based on the value the owner of the asset receives from not having to pay a royalty to use the asset and are amortized over mostly a three-year period. Acquisition-related expenses . Acquisition-related expenses are typically incurred for up to four quarters after each acquisition, with the majority of these costs being incurred within six to nine months, to transform the acquired business into the Company’s UplandOne platform. These expenses can vary based on the size, timing and location of each acquisition. These acquisition-related expenses include transaction related expenses such as banker fees, legal and professional fees, insurance costs and deal bonuses. These acquisition-related expenses also include transformational expenses such as severance, compensation for transitional personnel, office lease terminations and vendor cancellations. Generally these acquisition-related expenses should no longer be material if the Company has done no acquisitions after one year. Impairment of Goodwill . Goodwill impairment is recognized on a non-recurring basis when the Carrying Value (or GAAP basis book value) of our Company (which is our only reporting unit) exceeds the estimated fair value of our Company as determined by reference to a number of factors and assumptions, including the spot closing price of our Common Stock as of a certain reporting or measurement date. We assess Goodwill for impairment annually on October 1st, or more frequently when an event occurs which could cause the Carrying Value of our Company to exceed the estimated fair value of our Company. See “ Note 5. Goodwill and Other Intangible Assets ” in the notes to our consolidated financial statements for more information regarding our first quarter 2023 and our fourth quarter 2022 Goodwill impairment charges. We will continue to evaluate Goodwill impairment in future periods. Total Other Expense Total other expense consists primarily of amortization of debt issuance costs over the term of the related term loan, revaluation of foreign subsidiaries, interest expense on outstanding debt, partially offset by interest income on our interest-bearing cash balances held in money market accounts. We participate in interest rate swap agreements for the purpose of reducing variability in interest rate payments on the Company’s outstanding term loans. These interest rate swaps fix a portion of the Company's interest rate (including the hedge premium) at 5.4% for the term of the Credit Facility (as hereinafter defined in “ Liquidity and Capital Resources—Credit Facility ”). In addition, gains/losses on divested assets that meet the definition of a business under ASC 805-10, Business Combination—Overall , are included in Total other expense. 40 Income Taxes Because we have not generated domestic net income in any period to date, we have recorded a full valuation allowance against our domestic net deferred tax assets, exclusive of tax deductible goodwill. We have historically not recorded any material provision for federal or state income taxes, other than deferred taxes related to tax deductible goodwill and current taxes in certain separate company filing states and states in which loss carryforwards do not fully offset taxable income. The balance of the tax benefit for the years ended December 31, 2023, 2022 and 2021, outside of tax deductible goodwill and current taxes in separate filing states, is related to foreign income taxes, primarily operations of our subsidiaries in Canada and Ireland, and to the release of valuation allowances associated with acquisitions of domestic entities with a benefit generated in the UK and Australia fully offset by valuation allowances. Realization of any of our domestic deferred tax assets depends upon future earnings, the timing and amount of which are uncertain. Based on analysis of acquired net operating losses, utilization of our net operating losses will be subject to annual limitations due to the ownership change rules under the Internal Revenue Code of 1986, as amended, or the Code, and similar state provisions. In the event we have subsequent changes in ownership, the availability of net operating losses and research and development credit carryovers could be further limited. 41 Results of Operations Consolidated Statements of Operations Data The following tables set forth our results of operations for the specified periods, as well as our results of operations for the specified periods as a percentage of revenue. The period-to-period comparisons of results of operations are not necessarily indicative of results for future periods (dollars in thousands, except share and per share data). Year Ended December 31, 2023 2022 2021 Amount Percent of Revenue Amount Percent of Revenue Amount Percent of Revenue Revenue: Subscription and support $ 281,554 95% $ 297,887 94% $ 287,621 95% Perpetual license 6,077 2% 6,948 2% 2,150 1% Total product revenue 287,631 97% 304,835 96% 289,771 96% Professional services 10,221 3% 12,468 4% 12,245 4% Total revenue 297,852 100% 317,303 100% 302,016 100% Cost of revenue: Subscription and support (1)(2) 88,894 30% 93,948 30% 92,168 31% Professional services and other 7,467 2% 9,793 3% 7,285 2% Total cost of revenue 96,361 32% 103,741 33% 99,453 33% Gross profit 201,491 68% 213,562 67% 202,563 67% Operating expenses: Sales and marketing (1) 64,342 22% 59,416 19% 55,097 18% Research and development (1) 49,375 17% 46,187 15% 42,693 14% General and administrative (1) 61,264 21% 70,462 22% 76,901 25% Depreciation and amortization 58,614 20% 43,669 14% 41,315 14% Acquisition-related expenses 3,060 —% 21,556 6% 21,234 8% Impairment of goodwill 128,755 43% 12,500 4% — —% Total operating expenses 365,410 123% 253,790 80% 237,240 79% Loss from operations (163,919) (55)% (40,228) (13)% (34,677) (12)% Other Expense: Interest expense, net (18,684) (6)% (29,145) (9)% (31,626) (10)% Other expense, net 236 —% (781) —% (253) (1)% Total other expense (18,448) (6)% (29,926) (9)% (31,879) (11)% Loss before benefit from income taxes (182,367) (61)% (70,154) (22)% (66,556) (23)% Benefit from income taxes 2,493 1% 1,741 —% 8,344 4% Net loss (179,874) (60)% (68,413) (22)% (58,212) (19)% Preferred stock dividends and accretion (5,347) (2)% (1,846) (1)% — —% Net loss attributable to common stockholders (3) $ (185,221) (62)% $ (70,259) (22)% $ (58,212) (19)% Net loss per common share: Loss from continuing operations per common share, basic and diluted (3) $ (5.77) $ (2.23) $ (1.92) Weighted-average common shares outstanding, basic and diluted (3) 32,074,906 31,528,881 30,295,769 42 (1) Includes stock-based compensation. See table below for stock-based compensation by operating expense line item. Year Ended December 31, 2023 2022 2021 (dollars in thousands) Stock-based compensation: Cost of revenue $ 952 $ 1,984 $ 2,088 Research and development 2,463 2,733 3,085 Sales and marketing 2,059 4,239 5,957 General and administrative 17,400 32,646 42,743 Total $ 22,874 $ 41,602 $ 53,873 (2) Includes depreciation and amortization of $13.4 million, $12.5 million and $11.6 million in the years ended December 31, 2023, 2022 and 2021, respectively. (3) See “ Note 8 Net Loss Per Share ”, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discu ssion and a reconciliation of historical net loss attributable to common stockholders and weighted average shares outstanding for historical basic and diluted net loss per share calculations. Comparison of Years Ended December 31, 2023 and December 31, 2022 Revenue Year Ended December 31, 2023 2022 Change Amount Percent of Revenue Amount Percent of Revenue Amount % Change (dollars in thousands) Revenue: Subscription and support $ 281,554 95% $ 297,887 94% $ (16,333) (5)% Perpetual license 6,077 2% 6,948 2% (871) (13)% Total product revenue 287,631 97% 304,835 96% (17,204) (6)% Professional services 10,221 3% 12,468 4% (2,247) (18)% Total revenue $ 297,852 100% $ 317,303 100% $ (19,451) (6)% Subscription and support revenue was $281.6 million in the year ended December 31, 2023, compared to $297.9 million in the year ended December 31, 2022, a decrease of $16.3 million, or 5%. $13.9 million of the decrease relates to declining revenue from Sunset Assets as a result of reduced sales and marketing focus on those assets. Subscription and support revenues related to overage charges decreased by $1.1 million as a result of variable demand fluctuations in the year ended December 31, 2023. The subscription and support revenue decline includes a negative impact of $0.3 million from changes in foreign currency exchange rates. Additional decreases in Subscription and support revenue of $4.6 million are due to decreases in customer renewals across product lines and industries. These decreases are offset by revenue of $3.7 million from prior year acquisitions not fully reflected in the year ended December 31, 2022. Perpetual license revenue was $6.1 million in the year ended December 31, 2023, compared to $6.9 million in the year ended December 31, 2022, a decrease of $0.8 million, or 13%. The decrease is attributable to decreases in customer purchases of on-premise software. Professional services revenue was $10.2 million in the year ended December 31, 2023, compared to $12.5 million in the year ended December 31, 2022, a decrease of $2.3 million, or 18%. Professional services revenue related to our Sunset Assets decreased by $0.4 million. The remaining decrease in professional services revenue is attributable to fewer implementation projects in the year ended December 31, 2023. 43 Cost of Revenue and Gross Profit Margin Year Ended December 31, 2023 2022 Change Amount Percent of Revenue Amount Percent of Revenue Amount % Change (dollars in thousands) Cost of revenue: Subscription and support (1) $ 88,894 30% $ 93,948 30% $ (5,054) (5)% Professional services 7,467 2% 9,793 3% (2,326) (24)% Total cost of revenue 96,361 32% 103,741 33% (7,380) (7)% Gross profit $ 201,491 68% $ 213,562 67% $ (12,071) (6)% (1) Includes depreciation and amortization expense as follows: Depreciation $ 5 —% $ 8 —% $ (3) (38)% Amortization $ 13,366 4% $ 12,469 4% $ 897 7% Cost of subscription and support revenue was $88.9 million in the year ended December 31, 2023, compared to $93.9 million in the year ended December 31, 2022, a decrease of $5.0 million, or 5%. Variable telecom carrier costs decreased $6.5 million as a result of reduced customer demand and non-cash stock based compensation decreased $1.1 million. These decreases were offset by increased hosting expenses for all of our products and increased non-cash amortization of intangible assets associated with our Sunset Assets. Cost of professional services revenue was $7.5 million in the year ended December 31, 2023, compared to $9.8 million in the year ended December 31, 2022, a decrease of $2.3 million, or 24%. The decrease in cost of professional services revenue is primarily related to a decrease in personnel-related costs resulting from decreased professional services delivered. Operating Expenses Sales and Marketing Expense Year Ended December 31, 2023 2022 Change Amount Percent of Revenue Amount Percent of Revenue Amount % Change (dollars in thousands) Sales and marketing $ 64,342 22% $ 59,416 19% $ 4,926 8% Sales and marketing expense was $64.3 million in the year ended December 31, 2023, compared to $59.4 million in the year ended December 31, 2022, an increase of $4.9 million, or 8%. Sales and marketing expense increased approximately $8.8 million as a direct result of our intentional investment in our go to market strategy, including increased marketing spend and increased sales headcount and personnel-related costs to strengthen our marketing and demand generation. This increase is partially offset by a $2.1 million decrease in stock based compensation expense and a decrease of $1.8 million in sales and marketing expense related to our Sunset Assets. 44 Research and Development Expense Year Ended December 31, 2023 2022 Change Amount Percent of Revenue Amount Percent of Revenue Amount % Change (dollars in thousands) Research and development $ 49,375 17% $ 46,187 15% $ 3,188 7% Research and development expense was $49.4 million in 2023, compared to $46.2 million in 2022, an increase of $3.2 million, or 7%. Research and development expense increased approximately $5.4 million due to product investments as part of our growth initiative by building our India Center of Excellence. This increase was partially offset by a decrease of $2.2 million of research and development costs related to our Sunset Assets. General and Administrative Expense Year Ended December 31, 2023 2022 Change Amount Percent of Revenue Amount Percent of Revenue Amount % Change (dollars in thousands) General and administrative $ 61,264 21% $ 70,462 22% $ (9,198) (13)% General and administrative expense was $61.3 million in 2023, compared to $70.5 million in 2022, a decrease of $9.2 million, or 13%. This decrease was driven primarily by $15.2 million in lower non-cash stock compensation expense due to lower grant date fair values partially offset by an increase in general and administrative expense of $3.7 million due to higher personnel-related costs and an increase in legal and professional fees of $2.3 million, which includes $1.1 million in non-recurring litigation costs. Depreciation and Amortization Expense Year Ended December 31, 2023 2022 Change Amount Percent of Revenue Amount Percent of Revenue Amount % Change (dollars in thousands) Depreciation and amortization: Depreciation $ 1,414 1% $ 1,529 1% $ (115) (8)% Amortization 57,200 19% 42,140 13% 15,060 36% Total depreciation and amortization $ 58,614 20% $ 43,669 14% $ 14,945 34% Depreciation and amortization expense was $58.6 million in 2023, compared to $43.7 million in 2022, an increase of $14.9 million, or 34%. The increase in amortization relates to the reduced useful life expected for the acquired intangible assets such as customer relationships and tradenames for our Sunset Assets. The offsetting decrease in depreciation is due to assets becoming fully depreciated during the period. Acquisition-related Expense Year Ended December 31, 2023 2022 Change Amount Percent of Revenue Amount Percent of Revenue Amount % Change (dollars in thousands) Acquisition-related expense $ 3,060 —% $ 21,556 6% $ (18,496) (86)% Acquisition-related expense was $3.1 million in 2023, compared to $21.6 million for 2022, a decrease of $18.5 million, or 86%. The decrease in expense was a result of no acquisitions in 2023 compared to two acquisitions in 2022. Expense in 2023 primarily related to final settlements of the 2022 acquisitions. 45 Impairment of goodwill Year Ended December 31, 2023 2022 Change Amount Percent of Revenue Amount Percent of Revenue Amount % Change (dollars in thousands) Impairment of goodwill $ 128,755 43% $ 12,500 4% $ 116,255 930% Impairment of goodwill was $128.8 million in 2023, compared to $12.5 million for 2022. This increase was a result of the goodwill impairment evaluation we performed as of March 31, 2023 due to the decline of our stock price. Other Expense, net Year Ended December 31, 2023 2022 Change Amount Percent of Revenue Amount Percent of Revenue Amount % Change (dollars in thousands) Other Expense: Interest expense, net $ (18,684) (6)% $ (29,145) (9)% $ 10,461 (36)% Other expense, net 236 —% (781) —% 1,017 (130)% Total other expense $ (18,448) (6)% $ (29,926) (9)% $ 11,478 (38)% Interest expense, net was $18.7 million in 2023, compared to $29.1 million for 2022, a change of $10.4 million, or 36%, due primarily to higher interest income on our interest-bearing cash balances, a decrease in outstanding borrowings on our Credit Facility and the $2.5 million amortization of the deferred gain on the liquidation of a portion of our interest rate swaps as well as a $2.8 million benefit related to the deferred gain recognized immediately into earnings upon the $35 million prepayment on our Term Loans. Other income, net was $0.2 million in 2023, compared to other expense of $0.8 million in 2022, a change $1.0 million. The difference in other expense is primarily due to an increase in foreign currency exchange gains compared to 2022. Benefit from Income Taxes Year Ended December 31, 2023 2022 Change Amount Percent of Revenue Amount Percent of Revenue Amount % Change (dollars in thousands) Benefit from (provision for) income taxes $ 2,493 1% $ 1,741 —% $ 752 43% Effective income tax rate (1.4) % (2.5) % Benefit from income taxes was $2.5 million in 2023, compared to a benefit for income taxes of $1.7 million in 2022, an increase in the benefit from income taxes of $0.8 million, or 43%. This increased benefit was related primarily to the reduction of uncertain tax positions due to expiration of related statute of limitation for a Canadian exposure and foreign income taxes associated with our combined non-U.S. operations which is offset in Australia and the UK by valuation allowances. These tax benefits are offset by the impact of a material goodwill impairment in 2023, changes in deferred tax liabilities associated with amortization of U.S. tax deductible goodwill and U.S. state taxes in certain states in which the Company does not file on a consolidated basis or have net operating loss carryforwards. Comparison of Years Ended December 31, 2022 and December 31, 2021 For a comparison of the years ended December 31, 2022 and 2021 refer to “ Item 7. Management’s Discussion and Analysis ” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 28 , 2023. 46 Key Metrics and Non-GAAP Financial Measures In addition to the GAAP financial measures described in “ Results of Operations ” above, we regularly review the following key metrics and non-GAAP financial measures to evaluate and identify trends in our business, measure our performance, prepare financial projections and make strategic decisions (in thousands, except percentages): As of December 31, 2023 2022 2021 Other Financial Data (unaudited): Annualized recurring revenue value at year-end $ 242,136 $ 266,278 $ 257,056 Annual net dollar retention rate 95% 95% 94% Adjusted EBITDA $ 64,438 $ 97,105 $ 96,657 Annualized recurring revenue value at year-end We define annualized recurring revenue (“ARR”) as the value as of December 31 that equals the monthly value of our recurring revenue under support and subscription contracts excluding month-to-month contracts measured as of December 31 multiplied by 12. This measure excludes the revenue value of uncontracted overage fees, on-demand or monthly usage service fees and Sunset Assets. As a metric, ARR mitigates fluctuations in revenue recognition due to certain factors, including contract term and the sales mix of recurring revenue contracts and perpetual licenses. ARR does not have any standardized meaning and may not be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenues and deferred revenues and is not intended to be combined with or to replace either of those elements of our financial statements. ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our clients. Refer to “ Note 3 Acquisitions ” and “ Note 5 Goodwill and Other Intangible Assets ” in the notes to the consolidated financial statements for further discussion. Our ARR was $242.1 million, $266.3 million and $257.1 million as of December 31, 2023, 2022 and 2021, respectively. Annual net dollar retention rate We measure our ability to grow and retain ARR from existing clients using a metric we refer to as our annual net dollar retention rate. We define annual net dollar retention rate as of December 31 as the aggregate ARR as of December 31 from those customers that were also customers as of December 31 of the prior fiscal year, divided by the aggregate ARR value from all customers as of December 31 of the prior fiscal year. This measure excludes the revenue value of uncontracted overage fees, on-demand service fees and our Sunset Assets. Our annual net dollar retention rate was 95%, 95% and 94% as of December 31, 2023, 2022 and 2021. Adjusted EBITDA We monitor Adjusted EBITDA to help us evaluate the effectiveness and efficiency of our operations. We define Adjusted EBITDA as net income (loss), calculated in accordance with GAAP, adjusted for depreciation and amortization expense, net interest expense, loss on debt extinguishment, net other expense, benefit from income taxes, stock-based compensation expense, acquisition-related expense, purchase accounting deferred revenue discount and impairment of goodwill. Adjusted EBITDA is a non-GAAP financial measure that our management believes provides useful information to management, investors and others in understanding and evaluating our operating results for the following reasons: • Adjusted EBITDA is widely used by our investors and securities analysts to measure a company’s operating performance without regard to items that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired; • Our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, in the preparation of our annual operating budget, as a measure of our operating performance, to assess the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance because Adjusted EBITDA eliminates the impact of items that we do not consider indicative of our core operating performance; • Adjusted EBITDA provides more consistency and comparability with our past financial performance, facilitates period-to-period comparisons of our operations and also facilitates comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results; and 47 • Adjusted EBITDA should not be considered as an alternative to net loss or any other measure of financial performance calculated and presented in accordance with GAAP. The use of Adjusted EBITDA as an analytical tool has limitations such as: • Adjusted EBITDA should not be considered as an alternative to net loss or any other measure of financial performance calculated and presented in accordance with GAAP. • Impairment of goodwill and depreciation and amortization are non-cash charges, and the assets being depreciated or amortized, which contribute to the generation of revenue, will often have to be replaced in the future and Adjusted EBITDA does not reflect cash requirements for such replacements; however, much of the depreciation and amortization relates to amortization of acquired intangible assets as well as the goodwill as a result of business combination purchase accounting adjustments, which will not need to be replaced in the future; • Adjusted EBITDA may not reflect changes in, or cash requirements for, our working capital needs or contractual commitments; • Adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation; • Adjusted EBITDA does not reflect interest or tax payments that could reduce cash available for use; and, • other companies, including companies in our industry, might calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as comparative measures. Because of these limitations, you should consider Adjusted EBITDA together with other financial performance measures, including various cash flow metrics, net loss and our other GAAP results. The following table presents a reconciliation of Net loss from continuing operations to Adjusted EBITDA for each of the periods indicated (in thousands). Year Ended December 31, 2023 2022 2021 Net loss $ (179,874) $ (68,413) $ (58,212) Depreciation and amortization expense 71,985 56,146 52,928 Interest expense, net 18,684 29,145 31,626 Other expense, net (236) 781 253 Benefit from income taxes (2,493) (1,741) (8,344) Stock-based compensation expense 22,874 41,602 53,873 Acquisition-related expense 3,060 21,556 21,234 Non-recurring litigation costs 1,126 33 — Purchase accounting deferred revenue discount 557 5,496 3,299 Impairment of goodwill 128,755 12,500 — Adjusted EBITDA $ 64,438 $ 97,105 $ 96,657 Core Organic Growth Rate Beginning with the three months ended June 30, 2023, we began disclosing our Core Organic Growth Rate, a non-GAAP financial measure. We use Core Organic Growth Rate as a key performance measure to assess our consolidated operating performance over time and for planning and forecasting purposes. Core Organic Growth Rate is the percentage change between two reported periods in subscription and support revenue, excluding subscription and support revenue from Sunset Assets and Overage Charges, as defined below. We calculate our year-over-year Core Organic Growth Rate as though all acquisitions or dispositions closed as of the end of the latest period were closed as of the first day of the prior year period presented. Core Organic Growth Rate does not represent actual organic revenue generated by our business as it stood at the beginning of the respective period. For the three-month period ended December 31, 2023, our Core Organic Growth Rate was negative 0.9%. Core Organic Growth Rates are not necessarily indicative of either future results of operations or actual results that might have been achieved had certain Sunset Asset classifications not been made or had certain acquisitions or dispositions been consummated on the first day of the prior year period presented. We believe that this metric is useful to management and investors in analyzing our financial and operational performance period-over-period along with evaluating the growth of our 48 business normalized for the impact of acquisitions and dispositions, as well as adjusting for the exclusion of non-core Sunset Assets and non-committed Overage Charges. For example, by including pre-acquisition revenue, Core Organic Growth Rate allows us to measure the underlying revenue growth of our business as of the end of the period presented, which we believe provides insight into our current performance. Related Defined Terms Overage Charges are subscription and support revenues earned in addition to contractual minimum customer commitments as a result of the usage volume of services including text and e-mail messaging and third-party pass-through costs that exceed the levels stipulated in contracts with the Company. The following table represents a reconciliation of total revenue, the most comparable GAAP measure, to core organic revenue for each of the periods indicated. Three Months Ended December 31, 2023 2022 (dollars in thousands) Reconciliation of total revenue to core organic revenue: Total revenue $ 72,178 $ 78,811 Less: Perpetual license revenue 1,760 1,628 Professional services revenue 2,234 3,035 Subscription and support revenue from Sunset Assets 10,211 14,982 Overage Charges 1,422 2,089 Core organic revenue $ 56,551 $ 57,077 Liquidity and Capital Resources To date, we have financed our operations primarily through cash generated from operating activities, the raising of capital including sales of our common stock and our convertible preferred stock, and borrowings under our Credit Facility (as hereinafter defined). We believe that current cash and cash equivalents, cash flows from operating activities and availability under our existing Credit Facility will be sufficient to fund our operations for at least the next twelve months. In addition, we intend to utilize the sources of capital available to us under our Revolver to support our continued growth via acquisitions. The following table summarizes our liquidity for the periods indicated: Year Ended December 31, 2023 2022 (dollars in thousands) Cash and cash equivalents $ 236,559 $ 248,653 Available borrowings from our Revolving Credit Facility (1) 60,000 60,000 Total Liquidity $ 296,559 $ 308,653 (1) Loans under the Revolver may be borrowed, repaid and reborrowed until August 6, 2024. The $12.1 million decrease in cash and cash equivalents from December 31, 2022 to December 31, 2023 was due primarily to the $35 million pay down on our outstanding borrowings and the $14.1 million paid to repurchase shares of the Company’s Common Stock, partially offset by the cash gain of $20.5 million from the sale of a portion of our interest rate swaps and other cash flows from operations. Our cash and cash equivalents held by our foreign subsidiaries was $29.2 million as of December 31, 2023. If these funds held by our foreign subsidiaries are needed for our domestic operations, we would be required to accrue and pay U.S. taxes to repatriate these funds to the U.S. However, our intent is to permanently reinvest these funds outside the U.S. and our current plans do not demonstrate a need to repatriate them to fund our domestic operations. We do not provide for federal income taxes on the undistributed earnings of our foreign subsidiaries. As of December 31, 2023 and 2022, we had a working capital surplus of $169.6 million and $170.1 million, respectively. 49 Series A Convertible Preferred Stock In August of 2022, we issued Series A Preferred Stock as discussed in “ Note 12. Series A Convertible Preferred Stock ” which provided us an additional $110.4 million in liquidity, net of issuance costs of $4.6 million, that we are using for general corporate purposes and intend to use for future acquisitions. Credit Facility Our Credit Facility, as defined and described in “Note 7. Debt” , is comprised of fully drawn Term Loans as of December 31, 2023 and a $60.0 million revolving credit facility which was fully available as of December 31, 2023. 2022 S-3 On October 21, 2022 we filed a resale registration statement on Form S-3 (File No. 333-267973) (the “2022 S-3”), on behalf of the Purchaser and pursuant to the Registration Rights Agreement, which became effective on November 1, 2022 and covers (i) the issued Series A Convertible Preferred Stock and (ii) the number of shares of the Company’s common stock issuable upon conversion of such Series A Convertible Preferred Stock, which amount includes and assumes that dividends on the Series A Preferred Stock are paid by increasing the Liquidation Preference of the Series A Convertible Preferred Stock for a period of sixteen dividend payment periods from the initial issuance date. See “ Note 12. Series A Convertible Preferred Stock ” for further details. The following table summarizes our cash flows for the periods indicated: Year Ended December 31, 2023 2022 (dollars in thousands) Consolidated Statements of Cash Flow Data: Net cash provided by operating activities $ 49,943 $ 29,979 Net cash used in investing activities (1,220) (63,222) Net cash provided by (used in) financing activities (61,384) 94,151 Effect of exchange rate fluctuations on cash 567 (1,413) Change in cash and cash equivalents (12,094) 59,495 Cash and cash equivalents, beginning of period 248,653 189,158 Cash and cash equivalents, end of period $ 236,559 $ 248,653 Cash Flows from Operating Activities Cash provided by operating activities is significantly influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business. Included in net cash provided by operations are one-time acquisition related expenses incurred for up to four quarters after each acquisition to transact and transform the acquired business into the Company's UplandOne platform. Additionally, operating cash flows includes the impact of earnout payments in excess of original purchase accounting estimates. Our working capital consists primarily of cash, receivables from customers, prepaid assets, unbilled professional services, deferred commissions, accounts payable, accrued compensation and other accrued expenses, acquisition related earnout and holdback liabilities, lease liabilities and deferred revenues. The volume of professional services rendered, the volume and timing of customer bookings and contract renewals, and the related timing of collections and renewals on those bookings, as well as the timing of spending commitments and payments of our accounts payable, accrued expenses, accrued payroll and related benefits, all affect these account balances. Cash provided by operating activities was $49.9 million for 2023 compared to $30.0 million for 2022, an increase of $20.0 million. This increase in operating cash flow is generally attributable to the working capital sources of cash outweighing the working capital uses of cash outlined below. Working capital sources of cash for the year ended December 31, 2023 included a one-time $20.5 million cash gain on the sale of a portion of our interest rate swaps in August 2023. A substantial source of cash is invoicing for subscriptions and support fees in advance, which is recorded as deferred revenue, and is included on our consolidated balance sheet as a liability. Deferred revenue consists of the unearned portion of booked fees for our software subscriptions and support and for professional services, which is amortized into revenue in accordance with our revenue recognition policy. We assess our liquidity, in part, through an analysis of new subscriptions invoiced, expected cash receipts on new and existing subscriptions, and our ongoing operating expense requirements. 50 Cash Flows from Investing Activities Our primary investing activities have consisted of acquisitions of complementary technologies, products and businesses. As our business grows, we expect our primary investing activities to continue to further expand our family of software applications and infrastructure and support additional personnel. Cash used in investing activities decreased $62.0 million in 2023 compared to 2022 primarily as a result of closing no acquisitions during the period compared to two acquisition in the comparable prior year period. Cash Flows from Financing Activities Our primary financing activities have consisted of capital raised to fund our acquisitions, proceeds from debt obligations incurred to finance our acquisitions, repayments of our debt obligations, and share based tax payment activity. Cash from financing activities decreased $155.5 million in 2023 compared to 2022. The decrease in cash provided by financing activities relates primarily to 2022 net cash proceeds of $110.4 million related to our Series A Preferred Stock, which did not reoccur in 2023, and by the use of $35 million used to pay down our Credit Facility in 2023 and $14.1 million of cash used for Common Stock repurchases in 2023. Contractual Payment Obligations The following table summarizes our future contractual obligations as of December 31, 2023 (in thousands): Next 12 Months Beyond 12 Months Total Debt Obligations (1) $ 5,400 $ 476,650 $ 482,050 Interest on Debt Obligations (2) 35,240 54,994 90,234 Operating Lease Obligations (3) 2,540 1,719 4,259 Purchase Commitments (4) 22,852 7,326 30,178 Total $ 66,032 $ 540,689 $ 606,721 (1) Consists of contractual principal payments on our Credit Facility. See “ Liquidity and Capital Resources ” above for further discussion regarding our Credit Facility. (2) Future interest on debt obligations is calculated using the interest rate effective as of December 31, 2023. We have entered into floating-to-fixed interest rate swap agreements to limit exposure to interest rate risk related to a portion of our debt. See “ Item 7A. Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk ” for further discussion. (3) We lease office space under operating leases that expire between 2024 and 2029. Operating lease obligations above do not include the impact of future rental income related to agreements we have entered into to sublet excess office space as a result of our transformation activities. (4) We define a purchase commitment as an agreement that is enforceable and legally binding and that specifies all significant terms, including: fixed or minimum services to be used; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Obligations under contracts that we can cancel without a significant penalty are not included. In addition, purchase orders are not included as they represent authorizations to purchase rather than binding agreements. The Company has purchase commitments related to hosting services, third-party technology used in the Company’s solutions and for other services the Company purchases as part of normal operations. In certain cases these arrangements require a minimum annual purchase commitment. Critical Accounting Policies and the Use of Estimates We prepare our consolidated financial statements in accordance with GAAP. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial 51 statement presentation, financial condition, results of operations and cash flows will be affected. While our significant accounting policies are more fully described in “ Note 2. Basis of Presentation and Summary of Significant Accounting Policies ” in the notes to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K , we believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. Income Taxes We are subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in evaluating and estimating our provision for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. The Tax Act has provisions that require additional guidance on specific interpretations of the tax law changes. Our provision for income taxes could be adversely affected by our earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize the related tax benefit, changes in foreign currency exchange rates, entry into new businesses and geographies and changes to our existing businesses, acquisitions and investments, changes in our deferred tax assets and liabilities including changes in our assessment of valuation allowances, changes in the relevant tax laws or interpretations of these tax laws, and developments in current and future tax examinations. The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities will be recognized in the period that includes the enactment date. We make significant estimates in determining the value of our deferred tax assets. These estimates include, but are not limited to, the expected reversal periods of deferred tax assets and liabilities, the availability of net operating losses and other carryovers and consideration of the future ability to generate taxable income. These estimates are inherently uncertain and unpredictable, and if different estimates were used, it would impact the value of our deferred tax assets and the income tax benefit recognized in fiscal 2023 and in future periods when the deferred taxes are realized. A valuation allowance is established against our deferred tax assets to reduce their carrying value to an amount that is more likely than not to be realized. As of December 31, 2023 we recorded a valuation allowance of $41.3 million against our deferred tax assets. If, in the future, we evaluate that our deferred tax assets are not more likely than not to be realized, an increase in the related valuation allowance could result in a material income tax expense in the period such determination is made. The Company has adopted an indefinite reinvestment position whereby foreign earnings for foreign subsidiaries are expected to be reinvested and future earnings are not expected to be repatriated. As a result of this policy, no deferred tax liability has been accrued in anticipation of future dividends from foreign subsidiaries. The Company accounts for the uncertainty of income taxes based on a “more likely than not” threshold for the recognition and derecognition of tax positions. The Company’s policy is to account for interest and penalties as a component of income tax expense. Goodwill Impairment We assess Goodwill for impairment annually on October 1st, or more frequently when an event occurs which could cause the Carrying Value (or GAAP basis book value) of our Company to exceed the estimated fair value of our Company. As we operate as one reporting unit, the Goodwill impairment evaluation is performed at the consolidated entity level by comparing the estimated fair value of the Company to its Carrying Value. We first assess qualitative factors to determine whether it is more likely than not that the fair value of our single reporting unit is less than its Carrying Value. qualitative factors considered include: industry and market considerations; macroeconomic conditions; and other relevant events and factors. Based on the qualitative assessment, if it is determined that it is more likely than not that the Company's fair value is less than its Carrying Value, then we perform a quantitative analysis using a fair-value-based approach to determine if the fair value of our reporting unit is less than its Carrying Value. Performing a quantitative goodwill impairment test includes the determination of the fair value of a reporting unit and involves significant estimates and assumptions. These estimates and assumptions include, among others, revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and the determination of appropriate market comparables. See “ Note 5. Goodwill and Other Intangible Assets ” for more information regarding our 2022 and 2023 Goodwill impairments. 52 Recent Accounting Pronouncements For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, refer to “ Note 2. Basis of Presentation and Summary of Significant Accounting Policies ” in the notes to the consolidated financial statements included in “ Part II—Item 8. Financial Statements and Supplementary Data ” of this Annual Report on Form 10-K.